How bad will it get?

The question on every consultants' lips at the moment is just how badly will a recession affect their business.

The answer comes in three stages.

First, it's increasingly hard these days to talk of a consulting "industry".  What we have instead is really a series of micro industries, each with their own micro economic climates.  Looking back at the data for 2002, it's clear that downturns in consulting start off in investment banks, then ripple through other areas of financial services.  No surprise there.  Cutbacks in consulting budgets then ripple through other sectors, starting off with those closest to consumer spending (retailing, then telecoms and consumer products) before moving on to the parts of the economy that supply products and services to those sectors already hit.  Ironically, by the time consulting expenditure among manufacturing is on the slide that in investment banks has started to come back.  Of course there are some sectors which stand aloof from this process, notably the public sector, where expenditure on consultants tends to increase as it decreases in the private sector.

These micro markets mean that the performance of niche firms will be wildly different, driven entirely by the sectors they focus on, but that bigger firms should be able to play the market, moving people from sectors where demand is shrinking to where it is growing.  However, the ability of firms to bend with the economic wind is not as great as it was - and this is my second point.  That's primarily because client demand for specialist skills has been steadily increasing for the last decade and that makes consulting firms less flexible.  Consultants who are expert in a specific field are far less easy to deploy in other fields than the generalists of old.  Thus, in 2002 it was just about possible to take consultants out of financial services practices and put them into public sector ones, but it's not today.  Consultants, like leopards, can't change their spots.

They can, however, travel.  My third and final point is that some, lucky firms will be able to compensate for their increasingly rigid organisational model by taking advantage of the fact that consulting is a more global industry than it was ten years ago.  Large, global firms will be able to protect their margins by using resources from different countries where salaries are lower.  Niche firms will look to export their specialist skills to countries which are at a different point in their economic cycle.

What I infer from this is that effect of a downturn will be patchy.  Some niche firms will thrive while others go to the wall.  The largest firms, working in a balanced portfolio of sectors, will ultimately be able to weather the storm.  The chief casualties will be the mid-sized firms whose spread of sectors may not be wide enough to spread their risk and which are not sufficiently global to shift their people or business.

It's clearly going to be a tough market, but it's going to be ten times tougher if you're caught in the middle ground.